Say on Pay “No” Votes Correlate with Securities Class Actions

Since 2011, all US public companies have been required to submit their compensation plans to a periodic advisory vote by shareholders, which is commonly referred to as "Say on Pay." A number of our clients have asked us whether "no" votes on Say on Pay seem to bear any relationship to securities class action (SCA) lawsuits, and whether we are incorporating this information into our litigation model.

The answer to the first question is a resounding "yes." In both 2011 and 2012, Russell 3000 companies that experienced SCAs were roughly twice as likely as index companies generally to experience Say on Pay "no" votes of 10% or more. For example, in 2011, nearly 54% of the companies that faced SCAs also received at least 10% "no" votes on Say on Pay; in 2012 over 46% of the companies facing securities litigation had negative votes at this level. These figures are striking because at most companies, "Say on Pay" resolutions are overwhelmingly approved: across the two years, only 25% of companies in the Russell 3000 experienced "no" votes of 10% or more.

However, it's important to note that this analysis covers only two years of data (and a total of 130 SCAs), and showed a simple relationship between votes and SCAs that occurred in the same year, without analyzing which came first or how much time elapsed between them. To incorporate this data into our statistical model, we would need a much larger data set, and would have to track exact dates in order to see if shareholder votes could help predict subsequent SCAs, with various lead times. So this is a project we'll likely revisit a few years down the road.

In short, while not conclusive, our review of the first two years of Say on Pay does show a link between shareholder disapproval of pay plans and SCAs. The reason for this may be that poor compensation practices are associated with other weaknesses in management quality that make firms more likely to face securities class action litigation.